Wednesday, October 29, 2008

By John Baden, Chairman of the Foundation for Research on Economics & the Environment (FREE), based in Bozeman, MT.

In response to my recent column, "What Went Wrong," several people emailed me this question: What's next? The answer is easy; America will attempt to emulate Europe's welfare state. Our perceived crisis is inimical to sound policy and provides a good seedbed for political opportunism.

First, though, a positive note. America can congratulate itself on successfully overcoming racial prejudice. Consider Obama's enthusiastic reception at the University of Mississippi, a school where, in 1962, federal marshals were required to protect James Meredith when he was admitted to the Law School. Riots followed, and it took several regiments of U.S. Army troops to restore order and protect Meredith from harm. This election is a benchmark, genuine progress to celebrate. It's as though we cured or, at the least, arrested a debilitating if not quite lethal cancer.

However significant this progress, and progress it surely is, 2008 may also mark the end of the great American experiment in individual liberty and responsibility. Attempts to activate the European welfare state in America will dominate politics for the foreseeable future. Here's why.

Those who created the American experiment recognized the problem of constraining two kinds of bandits: the stationary and the mobile. Mobile bandits include highwaymen, pirates, common thieves, and muggers. These are conceptually easy to constrain; enlist honest police.

Stationary bandits are more difficult, and were a focus of America's founders. Their challenge was to create a constitution to generate and maintain laws that foster progress-while constraining those making the laws.

How might those in power be kept from rigging the game to the advantage of themselves and their most politically powerful constituents?

Over the long run this may be impossible in a large democracy comprised of numerous factions, interest groups, and ethnic and racial identities. No such nation has successfully dealt with this challenge. It is easier in a small, relatively homogenous country, not one like ours.

The current worldwide financial crisis gives license to our stationary bandits to advantage themselves and powerful constituents. Franklin Raines, White House Budget Director under Clinton, became CEO of Fannie Mae and received $90 million in salary and bonuses. Of course Fannie Mae had made large and strategic concessions and donations to politicians. That's how politics works.

America's automakers, protected for years by tariffs from foreign competitors, are but one of numerous corporate examples of powerful firms, and unions, shaping the rules and seeking to loot taxpayers. Such pleading is bound to increase; the political tide is with those who see and seize opportunities for advantage, always, of course, in the "public interest." The results are ominous and the causes clear.

First, there is diminishing support for institutions that generate wealth rather than redistribute it. Who still advocates small government, low taxes, private property, and the market process? It's not a null, but surely a small, set of citizens-and few are among America's opinion leaders and political decision makers. We elect those who promise us our share. This does not augur well for the survival of a wholesome America.

A second factor is the huge increase in the disparity in income between the top one-tenth of one percent of the population and the remainder. While Americans have been more tolerant of substantial wage and salary differences than Europeans, there is a cultural threshold that we've long since passed.

Who thinks a CEO is really worth $25 or $50 million or more per year? Few voters do and resentment builds. And consider our reactions to $10 million dollar vacation homes.

Third, both positive and negative values increasingly converge and agglutinate. This promotes substantial class differences. If one is blessed with responsible parents, intelligence, favorable genetics, health, presentable appearance, and the ability to defer gratification, she is exceeding likely to prosper-and to marry one with similar characteristics.

However, everyone has one vote. The political calculus is obvious and on bold display; promising voters public largess brings victory and dependency.

What's next? A new and different America, one that will increasingly resemble the European welfare state. Some friends celebrate this anticipated change. Few however heed ecologists' admonition and ask: "And then what?

What are predictable consequences of the proposed changes?" That's a future column.